Hormones can affect traders’ views. Cambridge’s John Coates believes that the financial crisis was created, to some degree, by people’s body chemistry. Would having more women on Wall Street and in the City help? Let’s listen to John.
Here is the transcript of our conversation:
I am delighted to speak to John Coates who spent 12 years on Wallstreet with Goldman Sachs and Deutsche Bank as a trader in the heart of the beast, then moved on and now is a senior researcher at Cambridge University Neuroscience and Finance.
You can watch the video here:
So John you spent many years working on Wallstreet, why did you turn to Neuroscience to better understand the trading that happens on Wallstreet and the city in London?
JOHN COATES – I was running a trading desk for Deutsche Bank during the dot com bubble and I noticed during that time that traders had started acting in a way that wasn’t normal for their behavior – they were euphoric, delusional, they were taking too much risk and the moreover had terrible risk-reward trade-offs. As I said, these traders weren’t normally like that – normally they were a pretty prudent bunch. I wasn’t caught up in the dot com bubble but I certainly understood what they were going through because, on previous occasions when I had gone on a long term winning streak and I was expecting this bonus, I got a chemical high that was as powerful as any urge I had ever felt and it is very difficult to control.
Similarly when you are losing money, you come to see the world in a different way. You begin to see conspiracies everywhere and that too feels like it is chemically driven. I became increasingly convinced that our body chemistry was playing a huge role in shifting our risk preferences across the business cycle and the more I looked into it the more I decided it was a hypothesis I wanted to test. So that is why I went back to Cambridge.
KM – John, do you think when we look at the great recession we just went through that some of the work you have done really sheds light on how and why it occurred?
JC – I think so because in the first stage of our research we were looking at the molecules underlying irrational exuberance and irrational pessimism. We all know they exist, as long ago as Keynes he was talking about animal spirits but the fact that we have got these phrases…